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Report: Current oil market dynamics work in P5+1’s favor with Iran

 

This morning, Securing America’s Future Energy (SAFE) and Roubini Global Economics (RGE) released a report assessing the impact of current global oil market dynamics on Iran and the ongoing negotiations with the P5+1 over the country’s uranium enrichment activities. Today’s well supplied oil market, the report finds, has increased the economic challenges facing Iran under current sanctions while also creating room for additional sanctions, potentially tilting the balance in favor of the P5+1 as negotiations extend into 2015.

Specifically, if current oil market dynamics persist, Iranian oil export revenue will decline by 25 percent year-over-year in 2015 to $40 billion—well short of Iran’s projected budget requirement of more than $70 billion. In 2015, according to EIA’s oil price forecast of an $83 average Brent crude oil prices for the year, Iran’s oil revenues will drop by $10.2 billion from an estimated $49.6 billion in 2014 to $39.4 billion. This revenue shortfall is in addition to the significant losses Tehran has already experienced from sanctions—in 2013 alone, restricted oil exports removed $55 billion in estimated revenue from Tehran’s coffers, likely cutting the central government’s budget nearly in half. Ultimately, today’s lower prices add pressure on Iran to bring a successful end to nuclear negotiations, while allowing Western negotiators to work toward the best possible deal without risking damaging consequences for the global economy. 

However, current supply conditions also limit the relative benefits to Iran of returning its oil supplies to the market, since these additional volumes are likely to cause further price collapse. In this way, Iran is caught in a catch-22. Oil revenues are declining year-over-year and Iran is desperate to meet its government’s spending goals. But today’s well-supplied market and low prices give Iran little option but to negotiate in the hopes of increasing foreign investment and spurring economic relief. Lower than expected global oil demand, increased non-OPEC oil production, and the return of Libyan oil production have all contributed to oil’s $40 per barrel price drop since June. Estimates suggest prices will remain between $75 and $85/bbl in 2015, far below Iran’s required price of $120/bbl to satisfy federal spending requirements.

Thus, for the time being, oil markets are unlikely to constrain the United States as it works to negotiate a deal with Iran consistent with its long-term national security objectives, and this condition is extremely likely to hold in 2015 and potentially beyond. In fact, greater market flexibility could enable the P5+1 to not only maintain current sanctions at low-cost, but also to credibly threaten implementation of even more biting sanctions without risking economically-destructive oil price volatility. Click here to read the full report, “Iranian Nuclear Negotiations: As Talks Extend, Oil Markets Tilt the Balance in Favor of the P5+1.”